Oil prices - March 10

Don't sweat the oil speculatorsColin Barr, Fortune Rounding up the speculators sounds almost as appealing as killing all the lawyers. But neither will cool seething crude prices.

That is a point worth considering as oil markets run wild. Big traders are making a record bet that crude prices, up 26% over the past year, will rise further as unrest rattles the Middle East. It's tempting to view that bet as irresponsibly driving up gas prices and endangering a tepid economic recovery. How can market fundamentals that justified $80 oil six months ago do the same for $105 oil now? Can't we blame some dark conspiracy?

Alas no. The reality is that bets on higher oil prices are little more than a rational response to steadily rising fuel demand in a world of increasingly uncertain oil supplies. (10 March 2011)Suggested by EB contributor Jeffrey Brown (westexas). -BA

Saudi Arabia protests could be calamitous for oil marketTerry Macalister, Guardian/UK Saudi Arabia is synonymous with oil. Its massive reserves provide 90% of the country's revenues and 40% of its gross national product. More important still, the kingdom has historically been the world's largest producer and exporter of oil, a market fulcrum without which global energy markets would be thrown into turmoil.

So the prospect of protest, however small, raises crucial questions for the oil market: how likely is Saudi Arabia to follow the Egyptian or Libyan model, where uprisings have jeopardised oil output? And if Saudi oil output is compromised, what will happen to global oil prices, with the recent upturn already threatening to choke global economic recovery?

Saudi Arabia's oil wealth has enabled the kingdom's rulers to stifle dissent, providing a large war chest to buy off opposition. And even if there were heavy civil disturbances they should not immediately affect the extraction industry.

Saudi oil workers are treated extremely well and so are likely to be late in joining any protests. Key oil installations tend to be located in remote desert areas not easily accessible. The producing fields, refineries and export terminals are also surrounded by very tight security fences that could not easily be breached unless by determined armed forces. (9 March 2011)

Oil markets brace for Saudi 'rage' as global spare capacity wears thinAmbrose Evans-Pritchard, Telegraph/UK Those exhorting OPEC to boost output should be careful what they wish for. The cartel card can be played once only, and it risks exposing the fragility of the global energy system if the Gulf powers are seen struggling to deliver. --- Goldman Sachs suspects that OPEC has been pumping far above its agreed quota since November and therefore cannot easily raise output much without cutting deep into global spare capacity.

Jeff Currie, the bank's oil guru, said Saudi output had quietly crept up by 700,000 barrels a day (bpd) even before the Libyan supply shock.

Assumptions that OPEC has added 1.9m bpd over the last two years are wishful thinking. These new fields have been "largely offset" by attrition in old fields.

"We believe that OPEC spare capacity has already dropped below 2m bpd. The question therefore arises how much spare capacity is left to absorb potential supply disruptions in other countries," he said.

If this picture is broadly correct, spare capacity is already close to the wafer-thin levels that led to wild price moves in mid-2008. (8 March 2011)

The secret group setting the price of oil: Us (energy traders)Leah McGrath Goodman, Fortune In this excerpt from The Asylum: The Renegades Who Hijacked the World's Oil Market, Leah McGrath Goodman witnesses a NYMEX energy trader hazing ritual and watches Bill O'Reilly uncover how those traders set the price of a barrel of oil. --- It was dawn when I received my first of many after-hours phone calls from Mark Bradley Fisher, otherwise known as the Fish. A self-made millionaire with a Napoleonic sense of his own destiny, Fisher prided himself on his work ethic, his intellectual prowess, and his ability to rise early in the morning and toil late into the night. As a result, he had a habit of calling me almost exclusively at inconvenient times.

It was February 2005, the year Wall Street began to realize something was wrong with the oil market. Fisher, however, was not particularly disturbed. After all, he was one of the wealthiest and most powerful energy traders in the world.

... As a reporter for Dow Jones & Co., the financial news service that, along with the Journal, is owned by News Corp. (NWS), my beat was the energy market. My duties included writing two wire stories a day, one in the morning and one in the evening, about where oil prices were heading and why. So far, it had not been a difficult job, because ever since the start of the Iraq War oil prices went mostly one way—up.

There was a small problem, though. With oil prices going up every day, I was beginning to run out of clever narrative devices and plot twists to keep my commentary interesting. Most of the time, I would just sit at my desk, trying to think of a new way of saying the same thing I'd said the day before—that there no longer appeared to be enough oil in the world to meet rising demand, that the rock on which modern industrial civilization had been built seemed to be slowly crumbling.

The strange term being tossed around by experts at the time was "peak oil." Dismissed by the opposing experts as a ridiculous doomsday scenario, it referred to the moment when the world's oil production would begin to decline until supply ran out. The feeling was that this would not be a good thing, since there was no decent alternative for oil and no reliable way of knowing exactly when the planet had reached its tipping point. In the meantime, guessing when peak oil would arrive had become somewhat like a parlor game to industry insiders, each trying the shout the others down. But behind the scenes, a much more terrifying question overshadowed the debate: had peak oil already arrived—and nobody wanted to admit it yet?

On one point the experts could agree. The world was not prepared for the catastrophic end of oil. (9 March 2011)

If Oil Supply Declines Quickly, How do We Deal with It?Gail Tverberg, Our Finite World We don’t know precisely how oil supply will work out, but if it declines quickly, we need to think about how we can deal with such an outcome. A quick decline could come if some combination of events starts oil production on a downward spiral.

For example, Middle Eastern revolutions could take a significant amount of production off-line. As a result, oil prices could spike, leading to recession and debt defaults in many countries. The resulting financial crisis could make it difficult to maintain the current level of international trade, and could lead to a sharp reduction in oil supply within a few years because repair parts and international expertise needed for extraction drops off greatly.

This might be described as an application of Liebig’s Law of the Minimum. Oil is present, but various above-ground issues interfere with its production. Declining energy return on energy invested (EROI) will tend to make the situation worse, because it will tend to keep oil prices high and raise the need for investment capital. There is a possibility that lack of capital and failing international trade will also cause interference with the production of electricity, natural gas, coal, and uranium. Most of what we have been told are renewables (solar PV, large wind, electric cars) likely will cease to be manufactured in such a situation, since their production depends on the availability of fossil fuels.

We don’t know if such an adverse situation will arise, but if such a situation is even a possibility, it seems as though it should affect our approach to transition. The ideas I would suggest for dealing with this adverse situation are the following:

1. Resetting our view of the world to match what people historically have had.

2. Planning for the basics, to the extent we can.

3. Living life now as fully and completely as we can, since we really don’t know how bad the decline will be.

While this whole approach may be shooting too low, I think it can be a useful exercise for reshaping our thinking. (9 March 2011)

Oil Roller Coaster Gets Wilder (PO with a local slant)Eric Doherty, The Canadian With the price of oil soaring in recent weeks, politicians around the world are scrambling to react. The price of the benchmark 'Brent' crude oil has increased by almost 90% in just 12 months, to around $115 a barrel. Now some speculators are betting that the price is headed towards $200 a barrel, which would spell global economic chaos.

In Spain, the government has already moved to reduce the highway speed limit and lower train fares to save fuel. In the UK, the Conservative coalition government was proposing to increase the speed limit but is now suddenly reversing course and looking to take sudden action to cut oil consumption. According to the Observer, UK energy secretary, Chris Huhne, says they don't have much choice. "Getting off the oil hook is made all the more urgent by the crisis in the Middle East. We cannot afford to go on relying on such a volatile source of energy." The problem for the UK government is that they were counting on cheap oil, and made no preparation for anything else.

The fact is that our governments were warned about the potential for a destructive cycle of oil price spikes and economic crashes years ago. For example in the wake of the 2004 oil price spike, the US Department of Energy's 'Hirsch Report' warned of exactly this likelihood. Hirsch recommended an immediate crash program to reduce US dependence on oil, noting that even 20 years would be a tight time frame to make the necessary changes.

In 2005, the International Energy Agency published Saving Oil in a Hurry which focused on emergency measures that could be taken to rapidly reduce transportation oil consumption with some advance preparation. Recommended measures include having plans to quickly create networks of bus and cycling lanes. But it seems that most governments are not prepared, and are now flailing about instead of implementing plans.

In BC, governments are still acting as if oil was going to be cheap and plentiful forever. Instead of taking logical steps to reduce oil dependency and protect families from oil price shocks, the Campbell administration has spent more and more on road and freeway expansions. For example, according to Transport Canada, in 2008/2009 the BC provincial government spent over $2.2 billion on roads and Bridges, up from $1.2 billion in 2001/2002. Much of this was spent on roadway expansions. In contrast, the provincial government reported spending only $660 million on transit and nothing on BC railways.

Some of these roadway expansion projects, such as the Golden Ears and Port Mann freeway bridges, are supposed to be paid for by tolls. But even before the most recent oil price spike, traffic and toll revenue was far below what is needed to break even on the Golden Ears Bridge so TransLink funds have been diverted from transit to pay for a mostly empty freeway bridge. (8 March 2011)Recommended by EB contributor Bill Henderson who says, "A new BC activist who uses global trends to frame local issues." -BA

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